Summer gas prices at mercy of tense Middle East

Gas prices this summer could stay steady provided that an already-tense Middle East doesn't flare up.
As always, the political situation in the Middle East and U.S. relations with Iran will play a large part in what motorists pay for gasoline.

Jessica Merzdorf, Purdue University | May 23, 2012

Gasoline prices this summer could stay relatively steady provided that an already-tense Middle East doesn't flare up and nothing else happens to disrupt supplies, a Purdue University economist says.

As long as market conditions remain basically as they are now, gasoline likely will remain between $3.50 and $4 per gallon in Indiana, said Wally Tyner, an agricultural and energy economist. Because regional variability in gasoline prices has increased, motorists in California and much of the West Coast can expect to see prices above $4 for most of the summer, and the South and Southeast below $3.65.

But Tyner cautions that global instability and disruptions in supply could force prices upward.

As always, the political situation in the Middle East and U.S. relations with Iran will play a large part in what motorists pay for gasoline.

"Any disturbance in the Middle East or heightening of tensions with Iran could move crude oil up," Tyner said, "and that would send gasoline higher."

Supply can be interrupted by bad weather, such as hurricanes or tsunamis, or refinery or pipeline outages for other reasons. These can occur domestically and overseas. When they do happen, they often temporarily drive prices up until the disruption subsides, Tyner said.

On the other hand, sluggish economic growth, an increase in crude oil production and higher-than-normal crude oil stocks could bring prices down.

Recent developments in the economic crisis in Greece and an apparent slowdown in China's economy could be important to summer's gasoline prices.

"Economic growth or lack thereof is a major determinant of demand for gasoline," Tyner said. "If growth is slower, gasoline prices will be lower. Growth has slowed in China and in Europe. If that slowdown continues, it would put downward pressure on crude oil and gasoline prices."

Crude oil production worldwide has increased recently beyond global demand, a situation that would drive gas prices down. As production increases, crude oil stocks build to above-normal levels, which also could cause oil prices and, therefore, gasoline prices, to decrease.

If none of these situations occurs, prices will remain steady, Tyner said.

"While we cannot say how any of these factors will play out in the months to come, they are the key things to watch to determine where the pump prices will go," Tyner said. "If these factors remain pretty much as at present, pump prices will do the same."